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SPEC BUY Current Price

Target Price

$0.25

$0.48

SNAPSHOT

Ticker: GCY

Sector: Materials

Shares on Issue (m): 206.3

Market Cap ($m): 50.5

Cash Estimate: 2.2

Enterprise Value ($m): 48.3

52 wk High/Low: $0.27 $0.06

12m Av Daily Vol (m):

Resources (100% basis)

Mt g/t Moz

Dalgaranga 23.7 1.4 1.1

Glenburgh 21.3 1.5 1.0

$/oz

EV / Reserve -

EV / Resource 24

Directors:

Mike Joyce Non-Executive Chairman

Mike Dunbar Managing Director

Gordon Dunbar Non-Executive Director

John den Dryver Non-Executive Director

Graham Riley Non-Executive Director

Stan Macdonald Non-Executive Director

Substantial Shareholders:

Board and management 20.0%

JP Morgan Asset Management 9.4%

Share Price Graph

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Feb-15 May-15 Aug-15 Nov-15 Feb-16

Friday, 26 February 2016

Gascoyne Resources Less is more Analysts | Patrick Chang, CFA | Matthew Keane

Quick Read

Gascoyne Resources (GCY) is rapidly developing its Dalgaranga Project (80% interest),

located in Western Australia. A Pre-Feasibility Study (PFS) is expected in the March Q,

which could demonstrate a high margin project producing ~100koz pa for ~6 years.

Dalgaranga consists of two open pit deposits with outstanding metallurgical properties

(see below), benefitting both opex and capex. Whilst being smaller in scale when

compared to peer developers including Dacian (DCN) and Gold Road (GOR), Argonaut is

attracted to GCY’s technical simplicity, lower funding requirement, and management

ownership (~20%). Argonaut assigns a SPECULATIVE BUY recommendation and a A$0.48

target price.

Event & Impact | Positive Potential key project parameters include: The upcoming PFS (expected March Q) could

feature:

2.5Mtpa operation, producing ~100koz pa

Head grade of ~1.4g/t with recoveries >90%

Mine life of ~6 years

AISC of ~A$900-1,100/oz

Pre-production capex of ~A$60-100m

Two conventional open pits with gravity / CIL processing

Metallurgical superiority: Ore will likely be source from the Golden Wings and Gilbey’s

deposits. Attractive physical properties, including deep weathering (70m of free dig) and

softness of the fresh ore (bond work index of ~10.5/kwh per ton) should facilitate low

cost mining (reduced drill and blast requirements) and processing (lower crushing /

milling requirements). In addition, low reagent consumption (0.2-0.6kg cyanide per ton)

further reduces processing costs. Based on GCY’s metallurgical work and historic

production data, overall recoveries are expected to be >90% with ~60% gold recovered

through gravity from fresh ore.

Exploration upside: The Dalgaranga project offers further upside with several high

priority, inadequately drilled near mine targets (e.g. Hendricks). Every year of additional

mine life extension at similar grades adds A$0.11 to Argonaut’s valuation. Longer term,

the Glenburgh gold project, which GCY floated on, could deliver substantial organic

growth by delivering a larger scale project.

Recommendation

Argonaut assigns a SPECULATIVE BUY recommendation and a A$0.48 target price.


GCY Overview

GCY acquired an 80% interest in the Dalgaranga Project in Western Australia in 2012.

The project is situated in the Dalgaranga Greenstone belt in the Murchison Region. It is

advanced with 1.05Moz @ 1.4g/t (>50% Measured and Indicated) defined and a PFS

expected in the June Q. A Bankable Feasibility Study is expected in the March Q CY16.

The joint venture partner (private vendor) can elect to contribute pro-rata or convert to

a 2% royalty upon the delivery of a positive Feasibility Study (FS).

Figure 1: GCY project locations

Source: GCY

The Company also owns the 1.0Moz Glenburgh gold project (100%), which the 2009 IPO

was listed on. GCY completed a Feasibility Study on the project in August 2013,

demonstrating a ~73kozpa, >4 year project with a capex of A$60.4m. Whilst the

economics are less attractive, Argonaut recognises further exploration and evaluation

work could significantly increase the scale of the project through additional discoveries

which would enhance project economics.

GCY owns 80% interest in the

Dalgaranga gold project…

…in the Murchison region in

Western Australia…

…with 1.05Moz @ 1.4g/t Resource

defined

The Company also owns the

1.0Moz Glenburgh project


Valuation

Argonaut values GCY at A$0.48 per share, based on project and economic assumptions

in Table 1. We have assumed the vendor converting his interest into a 2% royalty. Our

valuation is 44c if the vendor contributes to project funding.

Table 1: Project and economic assumptions

Source: Argonaut

Argonaut’s AISC estimate is based on a LOM mining unit cost of A$2.7/t, milling cost of

A$14/t (fresh ore) and G&A cost of A$3.5/t. Sustaining capex is estimated at A$40/oz.

Argonaut’s pre-production capex estimate is A$90m, including working capital and

funding required to bring the project to a BFS. This figure is lower than peers projects

(see Table 2 below). Favourable factors supporting this figure include very soft ore

reducing crushing / milling requirements, excellent leach kinetics (fewer and smaller

tanks), existing site infrastructure and more competitive contractor rates.

Table 2: Recent gold project development comparisons

Source: Argonaut, Company report

Valuation Summary ($ps)Project 0.47Additional Resources 0.03Glenburgh 0.06Forwards 0.00

Corporate -0.08Cash 0.01

Total @10% discount rate 0.48

Key project assumptionsDalgarangaOwnership % 100Ore milled Mtpa 2.5Head grade Au g/t 1.4Recovery % 93

Production koz Eq pa 100Mine Life yrs 6.0

Strip ratio : 7.0"All-in" sustaining cost A$/oz 1025Pre-production Capex A$m 90

Long term PricingGold price US$/oz 1250Exchange rate : 0.72

FiscalGovernment royalty % 2.5Third Party royalty % 2.0Tax Rate % 30Discount Rate % 10

Recenly completed gold projects

Company Project Capacity (Mtpa) Capex Estimate (A$m) Contractor Completion date

La Mancha Mungari 1.5 110 Sedgman May, 2014

Millennium Nullagine 1.5 88 Mintrex / BEC September, 2012

Regis Garden Well 4.0 109 In-House August, 2012

Integra Randalls 1.0 76 GR Engineering August, 2011

Regis Moolart 2.0 73 In-House August, 2010

Argonaut values the Company at

A$0.48…

…based on assumptions listed in

Table 1

Argonaut’s AISC estimate is based

on a LOM mining cost of A$2.7/t

and milling cost of A$14/t


Dalgaranga

Simple open pit operation

The Dalgaranga project is located ~70km NW of Mt Magnet in the Murchison and

consists of two open pits (Golden Wings and Gilbey’s), both on granted Mining Leases.

Historic mining by Equigold and Western Reefs (in JV) from 1996 to 2000 produced

~230koz, predominantly from the Gilbey’s deposit (predominantly oxide).

The proposed mining will commence with the smaller Golden Wings open pit. The

deposit was drilled out by GCY since acquiring the project in 2013 and was largely

unexploited (only laterite mined). Adopting this route will also lower the technical risk of

the project given that the ore is predominantly oxide.

Figure 2: Dalgaranga Project tenement

Source: GCY

Superior metallurgy, soft ore

Metallurgical recoveries are expected to be >90%, based on historic production figures

and metallurgical programs conducted by the Company. Gravity recoveries are expected

to be >60%. The added bonuses of soft primary ore (bond index of ~10.5/kwht) and

deep weathering (to 70m) will facilitate low processing costs (lower power

consumption). Mining costs are estimated to be ~A$0.7-A$1/t cheaper (~A$130-150/oz)

due to reduced drill and blast requirements. Reagent consumption is low, estimated at

0.2-0.6/kg cyanide per ton of ore. These favourable attributes result in the low mining

and processing unit costs.

The ore at Gilbey’s is concentrated within strongly sheared porphyry and black shale

units, which are highly visible and assist with grade control. Historic production figures

and metallurgical tests indicated the shale units did not cause preg-robbing issues.

Further metallurgical work on fresh ore is expected.

The Dalgaranga Project is located

~70km NW of Mt Magnet…

…consisting of two simple open

pits…

…historic production of ~230koz,

predominantly from Golden Wings

Excellent metallurgy with

recoveries expected to be >90%…

…softness of the ore supports

lower opex and capex


Figure 3: Golden Wings cross section

Source: GCY

Exploration upside

A number of mineralised trends within the tenements will be followed up with further

exploration work. More advanced targets include Hendricks where previously drilling has

interested 12m @ 2.2g/t from 36m to EOH. The Company is currently testing six high

priority targets. Every year of open pit life at similar grades add ~A$0.11 to our

valuation.

Figure 4: Dalgaranga project aeromagnetic image with regional targets

Source: GCY

The operation is likely to start with

the Golden Wing deposit…

…which is predominantly oxide

and has a lower strip ratio

A number of mineralised trends

will be followed up…

…with early encouraging results

highlighting district potential


Glenburgh Project

Potential for a larger project

The Glenburg Project is located ~250km east of Carnarvon in the South Gascoyne Region

of WA. The project has an inventory of 1.0Moz @ 1.5g/t hosted in multiple deposits and

offers the potential for significant additional discoveries.

Geologically, the province is described as the high-grade metamorphic core zone of the

Early Proterozoic Capricorn Orogen. The region comprises granitoid intrusions, gneiss

domes, metamorphosed sedimentary rocks and remobilised Archaean basement gneiss.

Figure 5: Glenburgh project deposits

Source: GCY

Geological understanding of the region is relatively advanced. A highly magnetic unit

(BIF) was used as a marker horizon regionally, which identified a favourable gold host

unit immediately to the South. Most known deposits are hosted in this unit. Further

exploration targeting of this unit could result in additional discoveries.

Figure 6: Glenburgh geology

Source: GCY

The Glenburgh project is located

~250km east of Carnarvon…

…located in a high-grade

metamorphic terrane

Although the economics are less

attractive…

…unravelling the geology could

delineate sizable deposits…

…enhancing the project’s scale


Board of Directors

Rodney (Mike) Joyce – Non-Executive Chairman

Mr Joyce is a geologist with around 30 years experence in mineral exploration, following

graduation in 1979 with a BSc (Hons) degree from Monash University. He also holds a

MSc from the Royal School of Mines, University of London, UK. He was the leader of a

successful gold exploration team at Aberfoyle Resources Ltd responsible for significant

gold discoveries at Khartoum (Carosue Dam) and Davyhurst in WA prior to joining Giralia

Resources initially as the exploration manager and then as Managing Director.

Michael (Mike) Dunbar – Managing Director

Mr Mike Dunbar is a Geologist with over 20 years experience in exploration, resource

development and mining projects. Mike was involved in the discovery, delineation and

development of the +2Moz Thunderbox gold deposit, the discovery and delineation of

the Waterloo and Amorac Nickel Sulphide deposits in WA, the delineation of the Munali

Nickel deposit, the Mirabella Nickel deposit, the IOCG - Cloncurry Copper, Gold, Cobalt,

Magnetite as well as a number of smaller deposits. Mike's experience includes 4 years

with Eagle Mining NL, 6 years with LionOre (now Norilsk Nickel) and 6 years with the

Mitchell River group of companies including Albidon Limited, Mirabela Nickel, African

Energy, Sally Malay Mining (now Panoramic) and Exco Resources.

Graham Riley – Non-Executive Director

Mr Riley is a qualified legal practitioner, having gained his Bachelor of Law and Bachelor

of Jurisprudence Degrees. Graham was the Non-Executive Chairman of Giralia Resources

NL and Red Hill Iron Limited and a Director of Adelphi Energy NL, prior to their

takeovers. He was also a Non-Executive Director of Arc Energy Limited. He is currently

the Non-Executive Chairman of Entek Energy Limited.

Gordon Dunbar – Non-Executive Director

Mr Dunbar is a consulting geologist with 45 years experience. Gordon’s experience

includes exploration and mining geology roles with WMC, the evaluation of the Golden

Grove base metal deposit in WA, the Chief Geologist at Rosebery Mine in Tasmania and

management roles with BP Australia undertaking financial studies, monitoring the

evaluation of the Olympic Dam deposit and as Exploration manager for BP Minerals.

John den Dryver – Non-Executive Director

Mr den Dryver is a mining engineer with over 40 years mining experience. John joined

Mount Isa Mines in 1973. In 1982, John joined North Flinders Mines. He became the

Operations Manager for North Flinders after the mine was commissioned in 1986 and

over the next 10 years managed the operations as well as developing the further

discoveries in this region including the Callie Mine. In 1987 he was invited to join the

Board of North Flinders to become Executive Director- Operations.

Stan Macdonald Non-Executive Director

Mr Macdonald has been associated with the mining and exploration industry for many

years, having been instrumental in the formation of numerous ASX listed companies,

including Giralia Resources NL. Mr Macdonald is Director of Avocet Resources Limited

(formerly U3O8 Limited) and Zenith Minerals Limited.

Adapted from the Company’s website

The board and management

team…

…has a track record in mineral

exploration…

…development and operating gold

projects

http://www.gascoyneresources.com.au/corporate-overview/board-of-directors/


Information Disclosure Each research analyst of this material certifies that the views expressed in this research material accurately reflect the analyst's personal views about the subject securities and listed corporations. None of the listed corporations reviewed or any third party has provided or agreed to provide any compensation or other benefits in connection with this material to any of the analyst(s). General Disclosure and Disclaimer This research has been prepared by Argonaut Securities Pty Limited (ABN 72 108 330 650) (“ASPL”) or by Argonaut Securities (Asia) Limited (“ASAL”) for the use of the clients of ASPL, ASAL and other related bodies corporate (the “Argonaut Group”) and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient you must not use or disclose the information in this report in any way. ASPL is a holder of an Australian Financial Services License No. 274099 and is a Market Participant of the Australian Stock Exchange Limited. ASAL has a licence (AXO 052) to Deal and Advise in Securities and Advise on Corporate Finance in Hong Kong with its activities regulated by the Securities and Futures Ordinance (“SFO”) administered by the Securities and Futures Commission (“SFC”) of Hong Kong. Nothing in this report should be construed as personal financial product advice for the purposes of Section 766B of the Corporations Act 2001 (Cth). This report does not consider any of your objectives, financial situation or needs. The report may contain general financial product advice and you should therefore consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research is based on information obtained from sources believed to be reliable and ASPL and ASAL have made every effort to ensure the information in this report is accurate, but we do not make any representation or warranty that it is accurate, reliable, complete or up to date. The Argonaut Group accepts no obligation to correct or update the information or the opinions in it. Opinions expressed are subject to change without notice and accurately reflect the analyst(s)’ personal views at the time of writing. No member of the Argonaut Group or its respective employees, agents or consultants accepts any liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. Nothing in this research shall be construed as a solicitation to buy or sell any financial product, or to engage in or refrain from engaging in any transaction. The Argonaut Group and/or its associates, including ASPL, ASAL, officers or employees may have interests in the financial products or a relationship with the issuer of the financial products referred to in this report by acting in various roles including as investment banker, underwriter or dealer, holder of principal positions, broker, director or adviser. Further, they may buy or sell those securities as principal or agent, and as such may effect transactions which are not consistent with the recommendations (if any) in this research. The Argonaut Group and/or its associates, including ASPL and ASAL, may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. There are risks involved in securities trading. The price of securities can and does fluctuate, and an individual security may even become valueless. International investors are reminded of the additional risks inherent in international investments, such as currency fluctuations and international stock market or economic conditions, which may adversely affect the value of the investment. The analyst(s) principally responsible for the preparation of this research may receive compensation based on ASPL’s and / or ASAL’s overall revenues. Hong Kong Distribution Disclosure This material is being distributed in Hong Kong by Argonaut Securities (Asia) Limited which is licensed (AXO 052) and regulated by the Hong Kong Securities and Futures Commission. Further information on any of the securities mentioned in this material may be obtained on request, and for this purpose, persons in the Hong Kong office should be contacted at Argonaut Securities (Asia) Limited of Unit 701, 7/F, Henley Building, 5 Queen’s Road Central, Hong Kong, telephone (852) 3557 48000. Copyright © 2016. All rights reserved. No part of this document may be reproduced or distributed in any manner without the written permission of Argonaut Securities Pty Limited and / or Argonaut Securities (Asia) Limited. Argonaut Securities Pty Limited and Argonaut Securities (Asia) Limited specifically prohibits the re-distribution of this document, via the internet or otherwise, and accepts no liability whatsoever for the actions of third parties in this respect.

RESEARCH:

Ian Christie | Director, Industrial Research +61 8 9224 6872 [email protected] Patrick Chang | Analyst, Metals & Mining Research +61 8 9224 6835 [email protected] Matthew Keane | Analyst, Metals & Mining Research +61 8 9224 6869 [email protected] Helen Lau | Analyst, Metals & Mining Research +852 3557 4804 [email protected] INSTITUTIONAL SALES - PERTH:

Chris Wippl | Executive Director, Head of Sales & Research +61 8 9224 6875 [email protected] John Santul | Consultant, Sales & Research +61 8 9224 6859 [email protected] Damian Rooney | Senior Institutional Dealer +61 8 9224 6862 [email protected] Ben Willoughby | Institutional Dealer +61 8 9224 6876 [email protected] INSTITUTIONAL SALES – HONG KONG:

Travis Smithson | Managing Director - Asia +852 9832 0852 [email protected] Glen Gordon | Institutional Research Sales +852 3557 4874 [email protected] CORPORATE AND PRIVATE CLIENT SALES:

Glen Colgan | Executive Director, Desk Manager +61 8 9224 6874 [email protected] Kevin Johnson | Executive Director, Corporate Stockbroking +61 8 9224 6880 [email protected] James McGlew | Executive Director, Corporate Stockbroking +61 8 9224 6866 [email protected] Ian Dorrington | Director, Corporate Stockbroking +61 8 9224 6865 [email protected] Geoff Barnesby-Johnson | Senior Dealer, Corporate Stockbroking +61 8 9224 6854 [email protected] Rob Healy | Dealer, Private Clients +61 8 9224 6873, [email protected] Tony Locantro | Dealer, Private Clients +61 8 9224 6851, [email protected] Cameron Prunster |Dealer, Private Clients +61 8 9224 6853 [email protected] James Massey |Dealer, Private Clients +61 8 9224 6849 [email protected] Chris Hill | Dealer, Private Clients +61 8 9224 6830, [email protected]

mailto:[email protected]





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